Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Bemis (NYSE: BMS ) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Bemis.
What We Want to See
Pass or Fail?
|Growth||5-Year Annual Revenue Growth > 15%||7.8%||Fail|
|1-Year Revenue Growth > 12%||3.2%||Fail|
|Margins||Gross Margin > 35%||17.2%||Fail|
|Net Margin > 15%||3.3%||Fail|
|Balance Sheet||Debt to Equity < 50%||95.5%||Fail|
|Current Ratio > 1.3||2.37||Pass|
|Opportunities||Return on Equity > 15%||10.0%||Fail|
|Valuation||Normalized P/E < 20||15.64||Pass|
|Dividends||Current Yield > 2%||3.3%||Pass|
|5-Year Dividend Growth > 10%||4.5%||Fail|
|Total Score||3 out of 10|
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Bemis last year, the company has lost a point. A slowdown in revenue growth cost the Dividend Aristocrat, and the stock's lackluster performance hasn't made investors very happy over the past year, either.
Bemis is one of the many companies that make products you see every day but don't usually appreciate. In Bemis' case, the company provides packaging like shrink-wrapped flexible plastic and nonstandard-sized containers. Major consumer-products companies Procter & Gamble (NYSE: PG ) , Heinz (NYSE: HNZ ) , and Kraft Foods (NYSE: KFT ) are among the customers that Bemis serves with an array of innovative packaging techniques.
But Bemis has had an up-and-down year. Late last year, the company had to close some of its plants after a big earnings shortfall. More recently, though, Bemis has been able to boost its earnings somewhat in its most recent quarter, despite seeing net margins shrink.
The packaging business is intensely competitive, with RockTenn (NYSE: RKT ) and other players tending to focus on standard-sized package materials. Bemis' specialty on flexible materials gives it a competitive advantage, but it isn't invulnerable to competitor poaching.
For Bemis to keep improving, lengthening its nearly 30-year streak of dividend increases won't be enough. It also needs to find ways to grow its business. If it can do so, though, Bemis could easily get a lot closer to perfection in the years ahead.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
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